IDEAS home Printed from https://ideas.repec.org/a/now/jnlcfr/104.00000043.html

Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

Author

Listed:
  • Campbell, John Y.
  • Sunderam, Adi
  • Viceira, Luis M.

Abstract

The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953 to 2014, it was unusually high in the early 1980s and negative in the early 21st Century, particularly in the downturns of 2001 and 2007 to 2009. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by four state variables: the real interest rate, temporary and permanent components of expected inflation, and the nominalreal covariance of inflation and the real interest rate with the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. In the model, a high nominal-real covariance implies a high term premium and a concave yield curve. The decline in this covariance since the early 1980s has driven down our model-implied term premium on 10-year zero-coupon nominal Treasury bonds by about two percentage points.

Suggested Citation

  • Campbell, John Y. & Sunderam, Adi & Viceira, Luis M., 2017. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," Critical Finance Review, now publishers, vol. 6(2), pages 263-301, September.
    • Handle: RePEc:now:jnlcfr:104.00000043
    DOI: 10.1561/104.00000043
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1561/104.00000043
    Download Restriction: no
    File URL: https://libkey.io/10.1561/104.00000043?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:now:jnlcfr:104.00000043. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lucy Wiseman (email available below). General contact details of provider: http://www.nowpublishers.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.